This Scottish investor explains why he passed on a chance to invest in FanDuel, the sports site now worth more than $1 billion

Stuart Paterson is a founding partner at Scottish Equity Partners.
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Investors at venture capital firm Scottish Equity Partners decided not to back homegrown fantasy sports business FanDuel because it was too much of a risk, one of the fund's founding partners told Business Insider.

Since its incorporation in 1991, Scottish Equity Partners has backed more than 100 UK companies but it shied away from Edinburgh unicorn FanDuel, which is now valued above $1 billion.

Stuart Paterson, a partner at Scottish Equity Partners, told Business Insider in London that FanDuel "was on quite a fine line between skill-based gaming and gambling" that meant "it was a risk that investors couldn't take."

Online gambling is illegal in several major jurisdictions globally, including a number of US states.

Founded in 2009, FanDuel has a platform that entices sports fans into creating fantasy teams for US sports that can be pitched against strangers for a fee. The platform — used by five million people and operational in 40 US states — has proved incredibly popular with NFL (football), NBA (basketball), MLB (baseball), and NHL (ice hockey) fans.

"There probably does need to be some regulation [around gambling]. Hopefully there is," said Paterson. "Maybe the prizes need to be limited. Hopefully they can work their way through it and get a regulatory environment that supports it."

Paterson's fund has been used to back other fast-growing Scottish technology companies, including travel booking site Skyscanner, which is situated in the same office building as FanDuel.

Fortunately for FanDuel, which is relatively unknown in the UK, a number of other investors have been willing to take a punt on it, with Google Capital, Time Warner Investments and Turner Sports taking part in this summer's $275 million (£176 million) funding round, bringing total investment in the company up to $361 million (£234 million.)

Legal battles

Investors in FanDuel will be watching the company closely as it goes head-to-head in courts across the US with regulators who believe the company is guilty of illegal gambling.

Last month, New York state attorney-general Eric Schneiderman insisted that FanDuel and rival DraftKings be terminated, accusing them of operating gambling companies without a licence. The pair argued their case in New York last week.

Class action lawsuits are being assembled in several other states that will seek to reclaim money lost to "illegal" bookmakers.

For example, FanDuel is being sued in a court in Tennessee for $10 million (£6.6 million), while a DraftKings employee is facing accusations of insider trading after winning $350,000 (£233,000) through FanDuel competitions.

Jason Trost, the US-born cofounder of online betting exchange Smarkets, told The Sunday Times: "It's very possible that Americans will get rid of this completely."